Answer
Effective transfer-pricing systems should promote goal congruence, aid in subunit performance evaluation, motivate management effort, and preserve subunit autonomy in decision-making.
Work Step by Step
Effective transfer-pricing systems should possess the following properties:
1. Promote Goal Congruence: Transfer prices should align with the overall goals and objectives of the organization. They should motivate subunits to make decisions that are consistent with the organization's strategic aims.
2. Useful for Evaluating Subunit Performance: Transfer prices should facilitate the evaluation of subunit performance. They should provide a clear basis for assessing how well each subunit contributes to the organization's success.
3. Motivate Management Effort: Transfer prices should act as incentives, motivating managers and employees to put in their best effort. They should encourage subunits to work towards achieving their goals effectively.
4. Preserve Subunit Autonomy: While promoting alignment, transfer prices should also allow subunits a degree of autonomy in decision-making. This balance ensures that subunits can respond to local needs and challenges while contributing to the organization's overall objectives.
